Charities borrow for-profit strategies to do good

Small beginnings: An Indian man dyes natural fibers for weaving into mats, bags, and other handicrafts. His items are to be sold for a profit by Industree Crafts. The company also runs a nonprofit to support artisans in India.

Courtesy of Kim Alter/Virtue Ventures

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Industree Crafts helps rural artisans in India get out of poverty by selling their colorful handiwork to customers around the world. But it also wants to make a profit that it can plow right back into the business to help it grow.

To accomplish these sometimes conflicting tasks, Industree has split into two organizations: Industree Crafts Private Limited, a for-profit company that's opening a new line of stores and products called Mother India; and Industree Crafts Foundation, a nonprofit group that accepts charitable grants to help it train more artisans.

Originally, that meant imbuing nonprofits with the discipline and savvy of the business world. But increasingly, philanthropic endeavors are becoming hybrids. They may start as either for-profit or nonprofit entities, switch as needed, or, as Industree Crafts did, take advantage of both ways of working.

What we're seeing now is "a new generation" of young "social entrepreneurs," says Kim Alters, managing director of Virtue Ventures, a management consulting firm near Seattle that advises start-up companies with social missions. Universities such as Harvard and Oxford, Ms. Alters says, now offer classes on how to be a "hybrid manager" or "hybrid entrepreneur" using both nonprofit and for-profit techniques. (Alters teaches such a course at Oxford.)

Along with Google.org, the philanthropic arm of Google Inc., they back both nonprofit and for-profit enterprises that they feel can make a difference.

To these new generation philanthropists, "what really matters is actually improving the world.... They're kind of neutral whether the most efficient way is actually charity or investing," says Matthew Bishop, chief business writer at The Economist and coauthor with Michael Green of a new book called "Philanthrocapitalism: How the Rich Can Save the World." "They're looking at what can achieve the most positive change most quickly."

In some cases, a for-profit business "may drive change more quickly than classic charity," Mr. Bishop says.

Organizing as a for-profit company often allows a do-good enterprise to grow much more quickly. "There's a lot more investment capital and debt capital in the world than there are [foundation] grants," says David Bornstein, author of "How to Change the World: Social Entrepreneurs and the Power of New Ideas."

For example, a charity might decide it wants to give away reading glasses to the poor; a pair of eyeglasses might let a tailor extend his working career by decades, Mr. Bornstein says.

The charity could raise money to buy eyeglasses and distribute them. But if the poor are willing to pay a small amount for their eyeglasses, that money can be plowed back into the business. Local people then can be hired to sell the glasses, creating new jobs. "You create this model that can grow very quickly," Bornstein says. Many more people can be reached; in business terms, the project "scales up" much faster.

Treating someone in need as a paying customer also "forces you to listen to that person and take into account their feelings," he says. People will nearly always accept something that's free of charge even if it doesn't really meet their needs. If they have to pay for it, they become more demanding that it really be useful.

Setting up as a for-profit also has some legal advantages, says Dana Brakman Reiser, who teaches a seminar on the for-profit/nonprofit boundary at Brooklyn Law School. In the US, for-profits are not required to disclose as much information to the government about their internal workings as charities are. And by not forming a separate charitable foundation, large businesses could in theory transfer funds back from their charity work at any time if those assets were needed to support the core business. Google has said it won't take money back out of Google.org, for example, "but there's nothing legally to prevent that," she says.

Earlier this year, Muhammad Yunus, the 2006 Nobel Peace Prize winner and the godfather of the microlending movement that has helped define social entrepreneurship, criticized a for-profit microfinance bank in Mexico. The bank, called Compartamos, was charging high interest rates (70 percent per year or more) to make small loans. It made a 23 percent profit in 2007, a margin a conventional business could be proud of. Compartamos argued that its small loans are costly to administer, and that its success allows it to grow quickly and shows that millions of poor people feel they can benefit from small, high-interest loans.

Was Compartamos more interested in making a profit than helping the poor? Losing sight of your original mission is always a danger for any social enterprise, Alters says. "For-profits inherently are at a risk of making financial decisions over social decisions."

Some governments are setting up legal structures to aid the formation of for-profit businesses with social goals. In Britain, companies can pass a "community interest test" and become Community Interest Companies pledged to conduct their business for a social good, not purely for profit. Earlier this year Vermont set up a registry for low-profit limited liability companies, or L3Cs. The Vermont law is meant to encourage creation of socially conscious businesses and attract funding to them.

In the end, some charitable efforts will thrive as for-profit businesses and others will do better by staying nonprofit, Bornstein says. "People now are figuring out which is which."

A charity, after all, is a business that loses 100 percent of its capital, he says. A classic social enterprise might make a modest 3 percent return. But those don't have to be the only models: For example, you could have a social enterprise that loses only 25 percent of its capital and makes up the rest in donations, he says.

Social enterprises will continue to seek out creative funding strategies, Alters says.

"New philanthropists are challenging the way that giving is done," she says. "That's pretty exciting."